How auto lenders can reimagine themselves today for a world of change

Market pressures and trends — and how to address them

Businesses are making strategic decisions to effectively manage their operations in a period of dramatic uncertainty. Today, lenders are tightening credit standards to mitigate the increased risk of borrower default, as consumers — particularly those in lower-income brackets — are expecting financial instability.

As a result, cost pressures and containment are compelling many auto financing organizations to assess operating models and optimize costs, drawing on machine learning and generative AI capabilities. (For instance, lender focus has shifted to fulfilling customer service and collection needs through conversational AI rather than contact center agents.) Organizations are also exploring opportunities for outsourcing and identifying areas of strength to provide outsourcing and partnerships to others.

Outside of uncertainty, there are two broader areas of focus that exist today for auto lenders. 

1. Increased regulatory scrutiny

The Consumer Financial Protection Bureau’s exams and enforcement actions are increasingly targeting fairness and predatory business practices, as well as scrutinizing repossession practices, data collection and sharing, and customer complaint volumes. And a regulation by the Federal Trade Commission targets “junk fees” and repossession fees in a call for greater transparency. More broadly, evolving technology and the debate over whether it disproportionally impacts certain communities have triggered financial inclusion concerns. In response, auto lenders are considering: 

• Upgrades and modifications to core servicing and compliance management systems to align with changes 
• Deep-dive assessments of fees that document rationales while researching impacts on customer groups 
• Process testing and reviews for comprehensive controls and performance indicators, especially for repossession oversight, issue management, product risk assessment and complaint remediation 
• Preparation for potential regulatory examinations, assessing compliance and whether responses are adequate

2. Increased cost of vehicles and affordability

Auto production has returned to full strength, yet pent-up demand from pandemic shortages has been keeping prices high, according to industry sources¹. And consumers are being squeezed by high interest rates, increased loan amounts over longer terms and the resumption of student loan payments. Electric vehicles also add a dose of complexity, as their sticker prices are typically higher, requiring competitive and flexible loan options. The industry has explored various trends to mitigate these impacts, including: 

• Adjustments to key models (such as residual values and credit) to be more specific to consumers and assets, as well as forward looking 
• A deeper focus on services and customer experiences rather than price, enabled through organizational, operational and technology changes 
• A wider selection of cost-competitive and technologically advanced products that prioritize the company and customer focus on environmental, social and governance issues (requiring modernization transformations)